Many charities are in desperate need of alternative sources of funding to maintain their services. Many are seeking external support like emergency public appeals, or are approaching funders such as community foundations which have established response funds. However, some charities are lucky enough to have reserves but may be unsure of the best use of them.
Charities that have restricted funds and endowments should be reviewing them, considering whether there is any scope to release restrictions so they can be used to support their activities.
How to find out the nature of a charities reserve funds
Firstly, trustees must have a clear understanding of the nature of the reserves they hold. There are a number of different types of fund, including;
- Designated funds - these are funds that that the trustees themselves have earmarked for a particular purpose. As the restriction is self-imposed, the trustees can decide themselves whether to undesignated the funds and apply them for new purposes.
- Restricted funds - these are funds given to the charity for a specific purpose. This is a legally binding obligation and the trustees cannot remove or relax the restriction by themselves.
- Permanent Endowment funds - these funds are where the original intention was for the asset to be held by the charity forever, so they therefore can't be spent.
How to review the fund's terms of restriction
If the restrictions are legally binding, the terms on which the fund was given to the charity in the first place should be reviewed. For example, this could be a Will, deed of gift or grant agreement. It may be that these terms contain a mechanism for the restriction to be changed.
How can the Charities Act help?
Trustees may be able to use various powers under the Charities Act 2011 to change restrictions on funds to create additional flexibility. In some circumstances this will allow funds held as permanent endowments to be spent, as long as certain criteria are met.
Whilst these powers apply primarily to unincorporated charities, such as charitable trusts, they can also be used in appropriate circumstances by incorporated charities such as charitable companies and CIOs.
In many cases, except for the smallest funds, consent from the Charity Commission must be obtained.
Why you should consider the impact of releasing charity funds
The Charity Commission has issued guidance to trustees that accessing or releasing restricted funds should only be considered as a last resort. The Commission also encourages trustees to carefully consider the wider and longer term impacts of making such a decision on the charity’s overall financial resilience and donor relationships.
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